Peer beyond the wreckage of western financial systems and it may be possible to discern the outlines of the future. The end of the period of “global capital markets” and the “financial services revolution” is ushering in a new era – that of social business and investment.
With the collapse of large financial players, the very nature of unfettered financial markets is being questioned. Although the full cost of the meltdown is not yet known, we can be sure that the bill will be picked up by the taxpayer.
The banking system has been acting with an implicit state guarantee, for which the financial firms paid little – despite generating large sums for select employees and shareholders. Now that things have come unstuck, there is no recourse to the wealth that has been generated, which is a galling scenario for taxpayers. Their anger will be a feature of our political environment for many years to come.
Another feature of the financial bailout is the massive expansion of government indebtedness, especially in the US. These debts need to be serviced, and eventually repaid. Against this backdrop, one can forget about expenditure on social programmes.
The notion that society benefits so long as economic agents pursue pure profit-maximisation models and create wealth is now thoroughly discredited. So if the credibility of business has been seriously undermined, and government’s role severely limited by resource constraints, where should we look?
Civil society may have a role to play, but does it really possess the clout to address the scale of the problem? The answer would appear to come from an area that links all three main agents – state, private and civil – in our economy. The problem with the market-based system in its purest form was the complete absence of any social calculus. What we are now witnessing is likely to be the beginning of an economy where the full social impact of our businesses and our investments is taken into account. Signs of this trend have been evident for some time. A recent report by Eurosif, the Brussels-based trade body that encourages responsible finance, shows that, over the two years ending December 31 2007, socially responsible investment (SRI) funds in Europe have more than doubled to €2.7 trillion (£2.12 trillion) – representing 17.5% of European investment assets.
Two other asset classes with strong social return characteristics have also surged into the investment mainstream. Micro-finance has become an important feature in fixed-income portfolios, and alternative energy (“cleantech”) is becoming a core part of equity investment. In 2007, cleantech investment amounted to roughly $150bn (£117 bn).
At the smaller end of the scale, many new businesses have emerged, supported largely by individuals. These include retailer The Body Shop, online charity website Justgiving.com, the Ethical Property Company, which rents to social change organisations, Divine fairtrade chocolate, and a host of others. These businesses exploit the workings of the market to deliver tangible social benefits as well as financial returns. The fact that they generate financial surpluses means they are not dependent on the state or donors to conduct their activities – a very handy feature in the tough economic climate ahead.
Charities will still play a vital role, but those dependent on state funding will be at risk. Both the voluntary sector and other civil society organisations will probably need to become more market-driven and entrepreneurial.
Another indicator comes from leading business schools, where we can observe MBAs – a very astute, ambitious group – focusing on social business or “social entrepreneurship” as a potential profession. At the Judge Business School, Cambridge, I recently met a young man with a highly marketable background in bio-engineering who was “definitely going into social business”, rather than taking the well-worn path of MBAs who sought to “make money for 15-20 years and then give back to society”. When I asked why, his answer, without hesitation, was: “Why waste those years?”
Jeremy, a friend of mine who is considered a leader in the international development field, once told me that he was taught throughout his career that the corporate sector was ill-intentioned, and that all possible solutions lie with resident experts from his world. I recall my former colleagues at Lehman Brothers saying similar things about the infinite wisdom of markets! Unlike my old Lehman friends, Jeremy is still employed. He is lucky, but also perhaps cleverer. He told me that he found that the only real solutions to today’s intractable problems lie in using the wisdom of both the market and the development sector (and others).
It is on such linkages that the social business and investment sector is based. Economic activity is an inherently “social” activity, and excluding social impact was bound to end in disaster. It is indeed a shame it took such a severe crisis to bring this point home.
First Published in The Guardian in October 2008